How do Treasury bills work?
They are a form of zero-coupon bond. This means, you buy the T-bill at a purchase price that’s a discount from face value, hold it for a specified period of time, and then receive the face value (purchase price + interest) back. They are sold in multiples of $1000. For instance, you might be buying bills for $975 and receive $1000 after 6 months, where the $25 difference is the “interest” you receive. It is the bill’s discounted price that’s determined at auction, and which will determine the rate you get. The Treasury will not redeem the bill before maturity, but you can sell it to the secondary market, which consists of buyers interested in buying already issued Treasury securities, usually for a different price than what you originally paid at the auction.
Well, first of all – Treasury bills, or T-bills, are short term government debt obligations (meaning bonds). The government issues them every week to cover short term shortages in their cash flow, following the scary logic of you can always pay it back later. Investors lend the government the money for 1 to 6 months, and the government pays the investors back what they lent them, plus interest when the time is up. The bills are sold at a discount from their face value, meaning you might pay $49,000 for a 180 day, $50,000 T-Bill on January 1st. In 180 days, or roughly six months later on July 1st – the bill matures and you would be paid the full $50,000. The $1,000 difference between the purchase price and face value is the interest you earned. Some of you might be saying – “So what? I can buy T-Bills in my normal investment account”. Why tie up money buying them in my managed futures account. The answer is the “secret weapon” we spoke of earlier and the good part for futures traders: t
